Organization of the Petroleum Exporting Countries is an intergovernmental organization of 14 nations as of May 2017, founded in 1960 in Baghdad by the first five members (Iran, Iraq, Kuwait, Saudi Arabia, Venezuela), and headquartered since 1965 in Vienna. As of 2016, the 14 countries accounted for an estimated 44 percent of global oil production and 73 percent of the world’s “proven” oil reserves, giving OPEC a major influence on global oil prices that were previously determined by American-dominated multinational oil companies.

OPEC’s stated mission is “to coordinate and unify the petroleum policies of its member countries and ensure the stabilisation of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.” The organisation is also a significant provider of information about the international oil market. As of May 2017, OPEC’s members are Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia (the de facto leader), United Arab Emirates, and Venezuela, while Indonesia is a former member. Two-thirds of OPEC’s oil production and reserves are in its six Middle Eastern countries that surround the oil-rich Persian Gulf.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The formation of OPEC marked a turning point toward national sovereignty over natural resources, and OPEC decisions have come to play a prominent role in the global oil market and international relations. The effect can be particularly strong when wars or civil disorders lead to extended interruptions in supply. In the 1970s, restrictions in oil production led to a dramatic rise in oil prices and OPEC’s revenue and wealth, with long-lasting and far-reaching consequences for the global economy. In the 1980s, OPEC started setting production targets for its member nations; and generally when the production targets are reduced, oil prices increase, most recently from the organisation’s 2008 and 2016 decisions to trim oversupply.
Economists often cite OPEC as a textbook example of a cartel that cooperates to reduce market competition, but whose consultations are protected by the doctrine of state immunity under international law. In December 2014, “OPEC and the oil men” ranked as #3 on Lloyd’s list of “the top 100 most influential people in the shipping industry”. However, their influence on international trade is periodically challenged by the expansion of non-OPEC energy sources, and by the recurring temptation for individual OPEC countries to exceed production ceilings and pursue conflicting self-interests.

History and impact-

Post-WWII situation

In 1949, Venezuela and Iran took the earliest steps in the direction of OPEC, by inviting Iraq, Kuwait and Saudi Arabia to improve communication among petroleum-exporting nations as the world recovered from World War II. At the time, some of the world’s largest oil fields were just entering production in the Middle East. The United States had established the Interstate Oil Compact Commission to join the Texas Railroad Commission in limiting overproduction. The US was simultaneously the world’s largest producer and consumer of oil; and the world market was dominated by a group of multinational companies known as the “Seven Sisters”, five of which were headquartered in the US following the breakup of John D. Rockefeller’s original Standard Oil monopoly. Oil-exporting countries were eventually motivated to form OPEC as a counterweight to this concentration of political and economic power.

1959–1960 anger from exporting countries

In February 1959, as new supplies were becoming available, the multinational oil companies (MOCs) unilaterally reduced their posted prices for Venezuelan and Middle Eastern crude oil by 10 percent. Weeks later, the Arab League’s first Arab Petroleum Congress convened in Cairo, Egypt, where the influential journalist Wanda Jablonski introduced Saudi Arabia’s Abdullah Tariki to Venezuela’s observer Juan Pablo Pérez Alfonzo, representing the two then-largest oil-producing nations outside the United States and the Soviet Union. Both oil ministers were angered by the price cuts, and the two led their fellow delegates to establish the Maadi Pact or Gentlemen’s Agreement, calling for an “Oil Consultation Commission” of exporting countries, to which MOCs should present price-change plans. Jablonski reported a marked hostility toward the West and a growing outcry against “absentee landlordism” of the MOCs, which at the time controlled all oil operations within the exporting countries and wielded enormous political influence. In August 1960, ignoring the warnings, and with the US favoring Canadian and Mexican oil for strategic reasons, the MOCs again unilaterally announced significant cuts in their posted prices for Middle Eastern crude oil.

1960–1975 founding and expansion

The following month, during 10–14 September 1960, the Baghdad Conference was held at the initiative of Tariki, Pérez Alfonzo, and Iraqi prime minister Abd al-Karim Qasim, whose country had skipped the 1959 congress. Government representatives from Iran, Iraq, Kuwait, Saudi Arabia and Venezuela met in Baghdad to discuss ways to increase the price of crude oil produced by their countries, and ways to respond to unilateral actions by the MOCs. Despite strong US opposition: “Together with Arab and non-Arab producers, Saudi Arabia formed the Organization of Petroleum Export Countries (OPEC) to secure the best price available from the major oil corporations.” The Middle Eastern members originally called for OPEC headquarters to be in Baghdad or Beirut, but Venezuela argued for a neutral location, and so the organization chose Geneva, Switzerland. On 1 September 1965, OPEC moved to Vienna, Austria, after Switzerland declined to extend diplomatic privileges.

During 1961–1975, the five founding nations were joined by Qatar (1961), Indonesia (1962–2008, rejoined 2014-2016), Libya (1962), United Arab Emirates (originally just the Emirate of Abu Dhabi, 1967), Algeria (1969), Nigeria (1971), Ecuador (1973–1992, rejoined 2007), and Gabon (1975–1994, rejoined 2016). By the early 1970s, OPEC’s membership accounted for more than half of worldwide oil production. Indicating that OPEC is not averse to further expansion, Mohammed Barkindo, OPEC’s Acting Secretary General in 2006, urged his African neighbours Angola and Sudan to join, and Angola did in 2007, followed by Equatorial Guinea in 2017. Since the 1980s, representatives from Egypt, Mexico, Norway, Oman, Russia, and other oil-exporting nations have attended many OPEC meetings as observers, as an informal mechanism for coordinating policies.

1973–1974 oil embargo

In October 1973, the Organization of Arab Petroleum Exporting Countries (OAPEC, consisting of the Arab majority of OPEC plus Egypt and Syria) declared significant production cuts and an oil embargo against the United States and other industrialized nations that supported Israel in the Yom Kippur War. A previous embargo attempt was largely ineffective in response to the Six-Day War in 1967. However, in 1973, the result was a sharp rise in oil prices and OPEC revenues, from US$3/bbl to US$12/bbl, and an emergency period of energy rationing, intensified by panic reactions, a declining trend in US oil production, currency devaluations, and a lengthy UK coal-miners dispute. For a time, the UK imposed an emergency three-day workweek. Seven European nations banned non-essential Sunday driving. US gas stations limited the amount of gasoline that could be dispensed, closed on Sundays, and restricted the days when gasoline could be purchased, based on license plate numbers. Even after the embargo ended in March 1974 following intense diplomatic activity, prices continued to rise. The world experienced a global economic recession, with unemployment and inflation surging simultaneously, steep declines in stock and bond prices, major shifts in trade balances and petrodollar flows, and a dramatic end to the post-WWII economic boom.

The 1973–1974 oil embargo had lasting effects on the United States and other industrialized nations, which established the International Energy Agency in response, as well as national emergency stockpiles designed to withstand months of future supply disruptions. Oil conservation efforts included lower speed limits on highways, smaller and more energy-efficient cars and appliances, year-round daylight saving time, reduced usage of heating and air-conditioning, better insulation, increased support of mass transit, and greater emphasis on coal, natural gas, ethanol, nuclear and other alternative energy sources. These long-term efforts became effective enough that US oil consumption would rise only 11 percent during 1980–2014, while real GDP rose 150 percent. But in the 1970s, OPEC nations demonstrated convincingly that their oil could be used as both a political and economic weapon against other nations, at least in the short term.

1975–1980 Special Fund, now OFID

OPEC’s international aid activities date from well before the 1973–1974 oil price surge. For example, the Kuwait Fund for Arab Economic Development has operated since 1961.
In the years after 1973, as an example of so-called “checkbook diplomacy”, certain Arab nations have been among the world’s largest providers of foreign aid, and OPEC added to its goals the selling of oil for the socio-economic growth of poorer nations. The OPEC Special Fund was conceived in Algiers, Algeria, in March 1975, and was formally established the following January. “A Solemn Declaration ‘reaffirmed the natural solidarity which unites OPEC countries with other developing countries in their struggle to overcome underdevelopment,’ and called for measures to strengthen cooperation between these countries… The OPEC Special Fund’s resources are additional to those already made available by OPEC states through a number of bilateral and multilateral channels.”The Fund became an official international development agency in May 1980 and was renamed the OPEC Fund for International Development (OFID), with Permanent Observer status at the United Nations.

Review of Literature –

Does oil consumption promote economic growth in oil producers?: Evidence from OPEC countries

Citation – Jose Alberto Fuinhas, Antonio Cardoso Marques, Tânia Noélia Quaresma, (2015) “Does oil consumption promote economic growth in oil producers?: Evidence from OPEC countries”, International Journal of Energy Sector Management, Vol. 9 Issue: 3, pp.323-335, https://doi.org/10.1108/IJESM-03-2014-0003

Purpose

The oil-growth nexus is studied in a panel of Organization of the Petroleum Exporting Countries (OPECs), for a long time span (1960-2011), controlling for the specific context of oil production. Their membership in the cartel put them under a common guidance, which originates phenomena of cross-section dependence/contemporaneous correlation in the panel.

Design/methodology/approach

Recent panel data estimators and co-integration analyses are both pursued and discussed, namely, dealing with the heterogeneity of panels and the countries’ specific effects. The Driscoll–Kraay estimator proves to be appropriate in handling the panel properties.

Findings

Full understanding of the oil-growth nexus requires the short- and long-run effects to be broken down. The growth hypothesis was found only in the short run. The results suggest the presence of the resource curse phenomenon and prove that the cartel’s long-run growth goal could not being fully accomplished. Actually, both oil production and prices are not promoting economic growth in OPEC countries.

2)  Re-visiting the renewable energy–economic growth nexus: Empirical evidence from African OPEC countries

Citation -Oluwafisayo Alabi, Ishmael Ackah, Abraham Lartey, (2017) “Re-visiting the renewable energy–economic growth nexus: Empirical evidence from African OPEC countries”, International Journal of Energy Sector Management, Vol. 11 Issue: 3, pp.387-403, https://doi.org/10.1108/IJESM-07-2016-0002

Purpose

This paper aims to investigate the dynamic relationship between renewable energy and economic growth in African OPEC member countries (Angola, Algeria and Nigeria).

Design/methodology/approach

The fully modified ordinary least squares technique for heterogeneous cointegrated panels (Pedroni, 2000) is used to estimate the parameters of the model.

Findings

The study revealed four main findings. First, there is a bidirectional causality between renewable energy and economic growth in the long and the short run. Second, a bidirectional causality exists between non-renewable energy and economic growth in the short and long run. Third, a bidirectional causality exists between CO2 emissions and economic growth. Fourth, a unidirectional causality was also found between CO2 emissions and non-renewable energy consumption with the direction of causality stemming from the consumption of non-renewable energy to CO2 emissions.

Practical implications

Because renewable consumption enhances growth, OPEC-member Africa countries should encourage investment in modern renewable sources that has high conversion efficiency such as solar, wind and hydro to strengthen their response to mitigating the impacts of climate change.

3) Oil exports and non-oil exports: Dutch disease effects in the Organization of Petroleum Exporting Countries (OPEC)

Citation – Huseyin Karamelikli, Guray Akalin, Unal Arslan, (2017) “Oil exports and non-oil exports: Dutch disease effects in the Organization of Petroleum Exporting Countries (OPEC)”, Journal of Economic Studies, Vol. 44 Issue: 4, pp.540-551, https://doi.org/10.1108/JES-01-2016-0015

Purpose

The purpose of this paper is to examine the dynamic relationship between oil exports, non-oil exports, imports and economic growth in the Organization of Petroleum Exporting Countries (OPEC), covering the period 1972-2013 by using panel data analysis.

Design/methodology/approach

The results from the dynamic panel data methods are as follows: there exists the cross-sectional dependence on each variable. According to the cross-sectionally augmented panel unit root tests, all variables are stationary at the first difference. Westerlund and Edgerton (2007) LM Bootstrap cointegration test shows that there is a long-term relationship between variables.

Findings

The results obtained by the Common Correlated Effects (CCE) estimator indicate that the increase in oil exports has a positive impact on the GDP of all countries, while the increase in oil exports has a negative impact on the non-oil exports of some countries.

Originality/value

In this study, the relationship between oil exports, economic growth, imports and non-oil exports of the 12 OPEC member countries is tested by considering the cross-sectional dependence between 1972 and 2013. In the study, the authors found a positive relationship as a result of researching the impact of oil exports on economic growth in the frame of CCE panel estimations results.

4) The future of oil and energy: consequences for oil producing countries

Citation -Frank Bracho, (2000) “The future of oil and energy: consequences for oil producing countries”, Foresight, Vol. 2 Issue: 4, pp.379-390, https://doi.org/10.1108/14636680010802726

Conventional wisdom in the oil world is that the issue in the future will not be a lack of demand but a scarcity of oil. But this view is challenged by less conventional trends that allow us to propose an alternative scenario in which demand for oil in the near future falls dramatically with the development of new or alternative sources of energy capable of taking over the hegemonic role played by oil. The article examines the environmental, technological, corporate and economic, and political factors which support this alternative scenario. This analysis is used to consider the implications for OPEC and especially Venezuela of a shift away from oil to alternative sources of energy. The Second OPEC Summit in Caracas in September 2000 provides an opportunity for OPEC to look to the future, to focus on the transition to a new energy paradigm and consider its consequences for oil producing countries

5) Oil exports and non-oil exports: Dutch disease effects in the Organization of Petroleum Exporting Countries (OPEC) – 

Citation -Huseyin Karamelikli, Guray Akalin, Unal Arslan, (2017) “Oil exports and non-oil exports: Dutch disease effects in the Organization of Petroleum Exporting Countries (OPEC)”, Journal of Economic Studies, Vol. 44 Issue: 4, pp.540-551, https://doi.org/10.1108/JES-01-2016-0015

Purpose

The purpose of this paper is to examine the dynamic relationship between oil exports, non-oil exports, imports and economic growth in the Organization of Petroleum Exporting Countries (OPEC), covering the period 1972-2013 by using panel data analysis.

Design/methodology/approach

The results from the dynamic panel data methods are as follows: there exists the cross-sectional dependence on each variable. According to the cross-sectionally augmented panel unit root tests, all variables are stationary at the first difference. Westerlund and Edgerton (2007) LM Bootstrap cointegration test shows that there is a long-term relationship between variables.

Findings

The results obtained by the Common Correlated Effects (CCE) estimator indicate that the increase in oil exports has a positive impact on the GDP of all countries, while the increase in oil exports has a negative impact on the non-oil exports of some countries.

Originality/value

In this study, the relationship between oil exports, economic growth, imports and non-oil exports of the 12 OPEC member countries is tested by considering the cross-sectional dependence between 1972 and 2013. In the study, the authors found a positive relationship as a result of researching the impact of oil exports on economic growth in the frame of CCE panel estimations results.